Were Hedge Funds Right About Ecolab Inc. (ECL)?

In this article you are going to find out whether hedge funds think Ecolab Inc. (NYSE:ECL) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Ecolab Inc. (NYSE:ECL) a sound investment right now? The best stock pickers were buying. The number of bullish hedge fund positions improved by 8 in recent months. Ecolab Inc. (NYSE:ECL) was in 46 hedge funds’ portfolios at the end of June. The all time high for this statistics is 44. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ECL isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best artificial intelligence stocks to pick the best growth stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s take a glance at the new hedge fund action encompassing Ecolab Inc. (NYSE:ECL).

What does smart money think about Ecolab Inc. (NYSE:ECL)?

At the end of June, a total of 46 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ECL over the last 20 quarters. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Michael Larson’s Bill & Melinda Gates Foundation Trust has the most valuable position in Ecolab Inc. (NYSE:ECL), worth close to $868.7 million, amounting to 4.9% of its total 13F portfolio. The second most bullish fund manager is Cantillon Capital Management, led by William von Mueffling, holding a $442.8 million position; the fund has 3.8% of its 13F portfolio invested in the stock. Some other peers that hold long positions consist of Ian Simm’s Impax Asset Management, Cliff Asness’s AQR Capital Management and Tom Gayner’s Markel Gayner Asset Management. In terms of the portfolio weights assigned to each position Bill & Melinda Gates Foundation Trust allocated the biggest weight to Ecolab Inc. (NYSE:ECL), around 4.86% of its 13F portfolio. Cantillon Capital Management is also relatively very bullish on the stock, dishing out 3.85 percent of its 13F equity portfolio to ECL.

With a general bullishness amongst the heavyweights, key money managers were leading the bulls’ herd. Adage Capital Management, managed by Phill Gross and Robert Atchinson, created the biggest position in Ecolab Inc. (NYSE:ECL). Adage Capital Management had $36.2 million invested in the company at the end of the quarter. James Parsons’s Junto Capital Management also made a $32.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Ray Dalio’s Bridgewater Associates, and Benjamin A. Smith’s Laurion Capital Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Ecolab Inc. (NYSE:ECL) but similarly valued. These stocks are Takeda Pharmaceutical Company Limited (NYSE:TAK), U.S. Bancorp (NYSE:USB), Applied Materials, Inc. (NASDAQ:AMAT), Illinois Tool Works Inc. (NYSE:ITW), America Movil SAB de CV (NYSE:AMX), The Southern Company (NYSE:SO), and Illumina, Inc. (NASDAQ:ILMN). This group of stocks’ market valuations resemble ECL’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.6 hedge funds with bullish positions and the average amount invested in these stocks was $1681 million. That figure was $2100 million in ECL’s case. Applied Materials, Inc. (NASDAQ:AMAT) is the most popular stock in this table. On the other hand America Movil SAB de CV (NYSE:AMX) is the least popular one with only 11 bullish hedge fund positions. Ecolab Inc. (NYSE:ECL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ECL is 77.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately ECL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ECL were disappointed as the stock returned 3.2% since the end of June (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

Disclosure: None. This article was originally published at Insider Monkey.